Coinvesting with Larger PE Firm - Terms

Based on the most helpful WSO content, here are some insights on co-investing with larger PE firms and the typical terms you might encounter:

1. Independent Sponsor (IS) Role:

   • The IS is responsible for sourcing the deal, closing it, and actively managing it to drive value.
   • The IS does the heavy lifting, including due diligence, negotiations, and post-acquisition management.

2. PE Firm Role:

   • The PE firm provides the necessary capital for the acquisition.
   • They may also offer strategic guidance and support but are less involved in day-to-day operations compared to the IS.

3. Market Terms:

   • Equity Split: The IS typically receives a portion of the equity in the deal. This can range from 10% to 30%, depending on the specifics of the deal and the value the IS brings.
   • Management Fees: The IS may receive management fees for their active role in managing the company. This is often a percentage of the company's revenue or EBITDA.
   • Carried Interest: The IS may also receive a share of the profits upon exit, known as carried interest. This is usually around 20% of the profits after a preferred return to the PE firm.
   • Preferred Return: The PE firm often receives a preferred return on their investment before profits are shared. This is typically around 8% to 10%.

4. Example Structure:

   • Revenue: $75 million
   • EBITDA: Breakeven
   • Equity Split: IS receives 20%, PE firm receives 80%
   • Management Fees: IS receives 2% of revenue annually
   • Carried Interest: IS receives 20% of profits after an 8% preferred return to the PE firm

These terms can vary based on the specifics of the deal, the industry, and the negotiation between the IS and the PE firm.

Sources: What's happening during live deals?, PE Funds that Win - and IB that Tries, Overview of Sell-Side M&A, As an M&A Investment Banker, What Value Do You Actually Add?, Do your associates just not care?